Dell faces mutiny, stigma of management buyouts

Proxy war a possibility, but some analysts think deal will push through

SAN FRANCISCO (MarketWatch) — Dell Inc.’s bold plan to go private is facing some pretty serious pushback, and some experts believe a proxy battle with shareholders is now a distinct possibility.

Reuters

Michael Dell may have to battle his largest shareholders in his effort to take the PC maker private. But several analysts believe the deal will get closed.

However, several analysts covering Dell
US:DELL
believe the deal will go through — at or near the current price of $13.65 per share. While the PC maker’s stock is now trading at a small premium to the offer price, there is some doubt that opposition from two of the company’s largest institutional holders will lead to a higher offer.

The deal calls for a 45-day “go-shop” period when the company may explore other proposals, after which shareholders are expected to take a vote. No date for that vote has yet been set. Read “What history says about Dell’s LBO.”

But one thing that’s certain is that founder and CEO Michael Dell and his fellow investors, led by Silver Lake, face some level of uncertainty in their ability to close the $24 billion deal, underlining historic problems with management buyouts.

“For shareholders, it’s an inherent conflict where shareholders are negotiating with management,” Charles Elson of the Weinberg Center for Corporate Governance of the University of Delaware told MarketWatch.

Michael Klausner, who teaches business law and corporate governance issues at Stanford Law School, said it is both tricky and unusual in Dell’s case, given the huge stake of founder and CEO Michael Dell, who is “putting in a lot of money, which means he thinks it’s a good deal.”

Klausner added, however that “I suppose on the other side, they’re saying, ‘Wait a minute, he knows something we don’t know.”

Elson also highlighted this point, saying, “Management is buying you out, and management thinks there’s value there and they’re appropriating the value.”

“Ultimately, it’s a natural and unsolvable conflict,” he added.

And this conflict may be headed to a proxy battle.

Dell’s two largest institutional investors — Southeastern Asset Management and T. Rowe Price — have come out against the deal, as have some smaller shareholders. Southeastern Asset Management has hired proxy solicitation firm D.F. King & Co., and is pushing for a buyout price of $24.

That may be a long shot, although some analysts speculate that the final price of the deal could edge higher than the $13.65 offer.

On Monday, Aaron Rakers of Stifel Nicolaus, in a note to clients, argued that his own “sum-of-the-parts” analysis of Dell yields a valuation range of $16-$17 per share.

On Wednesday, Maxim Group analyst Ashok Kumar, in a note, speculated that the current deal price is “within spitting distance of investor’s reservation price.”

“Beyond this threshold, the returns would not compensate for the entailed risk,” Kumar, who downgraded Dell to hold from buy, added. “In spite of objections from a minority of shareholders, the transaction is likely to consummate at close to the current offer.”

That view was echoed by influential Bernstein Research analyst Toni Sacconaghi, who also thinks the deal will close “at or modestly above” the current Dell proposal. He downgraded Dell shares to a market-perform, or neutral, rating on Wednesday based on this reasoning.

“It is unclear that there will be enough shareholder opposition to scuttle the deal, unless ISS also opposes the transaction, which we believe is unlikely,” he wrote in his note to clients, referring to Institutional Shareholder Services, the influential group that advises big investors in corporate proxy contests.

Sacconaghi also noted that, in the last five years, 15 of 18 large leveraged buyout deals worth more than $2 billion were approved by shareholders at the initial offer price. He cited one deal that led to a higher price, which ironically involved Dell outbidding a management buyout offer for Quest Software last year.

What does history say about Dell?

The number of tech companies that have gone private totaled 15 in 2010, 25 in 2011 and 22 last year, according to data from Dealogic.

Dell’s stock price has edged about 20 cents higher than the buyout price. Klausner of Stanford Law School said that’s clearly a sign that “someone is betting it’s going to go higher.”

Which leads to different scenarios that could prove problematic to Dell’s bid to go private.

“There could be a bandwagon of others saying they want more,” Klausner said. “Another twist is that a hedge fund starts buying the company on a bet that it’s going to go higher.”

That makes him believe that “a higher price is a reasonable possibility,” Klausner said. “The safest thing to do is for the offer price to rise to ward off the price from going too much higher,” Klausner said.

Then again, the whole issue could go to a proxy vote, which Elson said would be “a huge distraction.”

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.